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Yields Go Dip Dip Dip

The bulls are out in full strength as bond yields reach a new low everyday. And there seem to be no negative trigger at the moment. But for how long will the momentum remain?

The government bond yields continued their southbound journey with the 10 –year (2012 7.40%) dipping to 6.45 per cent. This is the fourth successive week in which the 10-year paper has established a new record. Since the announcement of the credit policy, the yield on the 10-year paper has fallen by 54 basis points. Armed with last week's inflows of Rs 3000 crore due to CRR cut, the market participants bought aggressively at the medium-to-long end of the yield curve. The bullish sentiment was on the whole unaffected by the RBI's Rs 5000 crore sale, though the immediate announcement of a second sale did dampen the sentiment, for a short while. The RBI didn't create any havoc by playing around with the cut-off yields and as a result the 10-year benchmark touched an intra-day low of 6.41 per cent. However the apex bank's warning signals saw the 10-year yield edging up to 6.45 per cent.

In the government securities, prices came down by more than a rupee towards the medium-to-long end of the curve. Infact since the Monetary Policy on October 29, this segment of the yield curve has flattened. For instance, the spread between the one-year and 10-year paper has come down by 46 basis points while the one-year and 5-year spread has reduced by 22 basis points. The rally has been equally buoyant at the corporate bond mart, where the 5-year benchmark yield has come down by 37 basis points.

The outflow of Rs 11000 crore on account of two RBI sales was more than inflows, still the call rates moved in the corridor of 5.25%-5.40%, though up from last week's all time low of 2%-4%. With overnight rates ruling low, RBI received large subscriptions in its repo auctions at 5.5 per cent and mopped up over Rs 34,000 crore. The rupee climbed up to this year's high of Rs 48.18 against a dollar during the week. But it largely traded in a narrow range against the dollar. While the dollar inflows from exporters perked up rupee, at the same time RBI intervention capped the gains.

The Optimistic FinMin
Some news for the pessimists who thought that disinvestment fiasco will put India on a backtrack—the finance minister hopes the economy to grow an average 8 per cent over the next five years. Perhaps the reason for his optimism is–adequate cushion of forex reserves and core sectors of economy growing at a robust pace and a fiscal deficit well within the bounds till now. Again, the passing of the securitization bill this week, is welcome news for the banking system crippled with problems of non-performing assets.
And on top of it, lack of credit uptake has forced them to divert excess funds in bond market, thereby pushing down the interest rates further.

Outlook
With no fresh government auction lined up for the next week, the momentum is likely to remain bullish, not withstanding, the fact that RBI may once again raise the OMO sword.